Hybrid facilities – structures that blend traditional subscription (sub) lines with NAV (net asset value) lending – have been part of the fund finance conversation for several years. They began to gain real visibility around 2018–2020, regularly appearing on conference agendas and in lender pitches as the next development in fund finance: a single facility that could accompany a fund throughout its life, moving from a reliance on undrawn investor commitments in the early years to portfolio NAV as the fund matures.
In theory, the attraction is straightforward. A hybrid facility is designed to allow a fund to put one long-dated facility in place early on, borrow initially against uncalled capital commitments in a manner similar to a sub line, and then to transition over time to borrowing primarily against the NAV of the portfolio, as investments are made and harvested. The idea is to avoid the need for separate negotiations, separate mandates, and separate legal processes at different points in the fund’s life while also reducing associated fees.
In practice, however, the story has been more mixed. Hybrids are no longer regarded as exotic, but they remain far less common than the level of early hype might have led many to expect.
At a conceptual level, a hybrid combines two borrowing base components. One component is based on investor capital commitments. Here the collateral is the uncalled capital of eligible investors, and the advance rates tend can be high depending upon the credibility, credit profile and any significant concentrations of those investors. This component is especially powerful early in a fund’s life, when little or no capital has yet been drawn.
The second component is based on the NAV of the investment portfolio. In this leg, the collateral is the underlying assets of the fund, and advance rates can be significantly lower – potentially 10% – 20% of eligible NAV – reflecting the different risk dynamics of asset-based lending.
A “true” hybrid is one in which these two components are formally integrated into a single borrowing base, with defined rules as to how each contributes to availability as the fund evolves. That is distinct from more common structures that are sometimes labelled hybrids but are, in reality, subscription lines with a bit of asset collateral bolted on to improve terms, or NAV facilities that are simply enhanced with uncalled capital support in the absence of a separate sub line. In many situations where a sponsor and lender start out talking about a hybrid, the eventual structure is one of these “plus” variants rather than a fully bifurcated borrowing base.
There are a number of structural factors that have contributed to the more limited adoption of fully integrated hybrid facilities, notes Ron Franklin, head of Proskauer’s Fund Finance Group. One is organizational. Within many financial institutions, subscription facilities and NAV-based lending have historically been originated and underwritten by different business units, each with distinct credit frameworks, economic targets and risk appetites.
As a result, combining those products into a single facility can require alignment across internal constituencies that are not always naturally coordinated. By contrast, non-bank lenders and small banks, which are often able to operate with more flexible investment mandates, may be better positioned to underwrite genuine hybrid structures, Franklin adds.
A second issue is timing and information. When a hybrid is negotiated early in the life of a fund, the parties are trying to set eligibility criteria, covenants and borrowing base mechanics for assets whose revenue streams and performance profiles may still be forming.
That uncertainty can lead to more conservative structuring, heavier diligence requirements and more complex terms than would be necessary if a NAV facility were negotiated later, when the asset base is known and can be properly analyzed. As Franklin notes, “in some cases you can end up getting the worst of both worlds”, particularly when a hybrid is negotiated early in the fund’s life. “Because you are negotiating before you really know the collateral, you are effectively structuring around future assets.”
Franklin adds that, in those circumstances, “you are dealing with elements of both structures at a point where you don’t yet know what the portfolio will look like, so there is an inherent degree of uncertainty”, with the result that “there is a risk that the outcome is not as effective as a NAV facility put in place later, one the asset base is established and can be underwritten directly”.
Cost and complexity also play a role. Hybrids are inherently bespoke. They must take into account the structure of the fund and any SPVs, the specific nature of the underlying assets, the interaction between capital call support and asset security, and the intended uses of proceeds across the fund’s lifecycle. This drives significant legal and structuring effort. For smaller facilities, the incremental benefit over a straightforward sub line or a later-stage NAV facility can be difficult to justify once legal fees and internal time are factored in. As a result, hybrids tend to be more appropriate for larger, more complex transactions, where the facility size and strategic importance of the financing can comfortably support that additional complexity.
Despite these obstacles, there are circumstances in which hybrids make clear sense. The most compelling case is usually where the fund is no longer at its very beginning and already has a meaningful portfolio that can be assessed, yet still retains a substantial amount of uncalled capital. In that situation, both sides of the borrowing base can contribute materially to availability. If the fund also has large capital needs – for example, for follow-on investments and new deals – that would struggle to be met through either a pure sub line or a pure NAV line alone, then a hybrid can be a practical solution. This is particularly true where the lender has the capability to execute the structure without internal conflicts between product teams.
In those scenarios, the primary rationale for a hybrid is the overall quantum of available borrowing and the timing of that availability, rather than any perceived efficiencies in execution or documentation. A combined borrowing base can provide more consistent and, in some cases, enhanced availability across the fund transitions from reliance on uncalled capital to portfolio value, within a single facility structured to support the evolution over the life of the fund.
“Hybrids are an interesting option,” Franklin says. “There is a place for hybrid facilities, and where the parties are clear on the objectives and how the facility is expected to operate over the life of the fund, they can make a great deal of sense.”
Looking ahead, hybrid facilities are likely to remain a selective but established tool rather than a universal standard.
They are now widely recognized, particularly in the US, and no longer generate the same sense of novelty. Yet they continue to be used in a relatively narrow set of situations where both NAV and uncalled capital are genuinely required to achieve the fund’s objectives. Many of these transactions originate on the lender side, where banks or credit funds propose the structure once they understand the fund’s profile and needs, rather than from sponsors explicitly demanding hybrids as such. For most managers, the core strategic decision will remain how and when to use sub lines, when to layer in NAV financing, and whether a hybrid adds enough incremental availability and flexibility to justify its added complexity.
Under the right circumstances, hybrids can bridge those worlds effectively, offering a single, long-term, multi-collateral facility that evolves with the fund and supports its financing needs from early commitments through to mature portfolio.
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